Is Paul Krugman Right or Wrong? (20 points) Paul Krugman forecast a slowdown in

Question

Is Paul Krugman Right or Wrong? (20 points)

Paul Krugman forecast a slowdown in Asian economic growth in 1994. Yet, in 2018, many years later, the Chinese and Indian economies are still growing at rapid rates. Even today, India is expected (by some) to grow at greater than 7% this year and for the next several years. Does the recent rapid growth of India and China contradict Paul Krugman’s view of the Asian economies? Why or why not? Please write a brief essay that answers these questions. Your answer must make explicit reference to the empirical implications of a Solow-style growth model.

Explanation / Answer

Paul Krugman Analysis of asian economies performance was based on one major thing: These economies have prospered due to increase in input (Physical and output). This growth is not suastainable as there is no efficiency increase in the factors of production.

Hence if we look at the Solow model this growth has come from increase in investment. To sustain the increase in economic growth both the ideas along with productivity needs to shift up so that more output at less input be produced. Virtuous economic cycle starts. According to Krugman this was not happening in Asian economies and this was a short term boom and was likely to fade away. Depreciation of capital was also to reduce economiv growth.

Commenting about Indian and Chinese economic growth rates my analysis is Paul Krugman's analysis was incomplete and had any flaws in it. However, he was correct in saying that ideas and productivity play most important role. He seems to neglect the role of increasing world trade along with cost efficient production and tremendous capacity of Asian countries to change with technical change. He also did not considered huge demographic dividend both India and China have and how they can attract best of companies to invest and start faster virtuos cycles in an economy.

Reasons for Chinese economic growth :

1. Capitalist mindset with communist style decision making.

2. Huge supply of skilled manpower at lowest possible cost to become production hub.

3. Undervalued currency that promoted exports.

4. Policy of mport substitution.

5. Investments in other asian countries to make them economically dependent on China.

However, India has different reasons for its growth.

1. Strong domestic economy.

2. Role of government to facilitate business

3. Skilled manpower especially in Information technology.

4. Democratic governance.

When we look at all these factors then we come to know that as per Solow model there were conscious efforts that these countries put in for its growth. Increase in investment, adapting to new technology to increase productivity and also less depreciation of physical assets. These economies have also ensured that efficiency has increased. Hence Krugman is wrong when he predicts that these may be short run peaks.

It is very evident now that with huge foreign exchange reserves, demographic dividends, increase in enterprise and being huge domestic economies that can dictate terms to the world in terms of trade, India and China are ready to grow further. However, this is not the case with all Asian economies. All those countries ho could keep pace with changes in technlogy and productivity are doing better and rest with political instabilitties are struggling.

Western supremecy is likelt to be there as technology mainly passes from them.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.